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Economy
of
China

Economic Reforms

Since 1979, China has reformed and opened its economy. The Chinese leadership has adopted a more pragmatic perspective on many political and socioeconomic problems, and has reduced the role of ideology in economic policy. China's ongoing economic transformation has had a profound impact not only on China but on the world. The market-oriented reforms China has implemented over the past two decades have unleashed individual initiative and entrepreneurship. The result has been the largest reduction of poverty and one of the fastest increases in income levels ever seen. China today is the fourth-largest economy in the world. It has sustained average economic growth of over 9.5% for the past 26 years. In 2006 its $2.68 trillion economy was about one-fifth the size of the U.S. economy.

In the 1980s, China tried to combine central planning with market-oriented reforms to increase productivity, living standards, and technological quality without exacerbating inflation, unemployment, and budget deficits. China pursued agricultural reforms, dismantling the commune system and introducing a household-based system that provided peasants greater decision-making in agricultural activities. The government also encouraged nonagricultural activities such as village enterprises in rural areas, and promoted more self-management for state-owned enterprises, increased competition in the marketplace, and facilitated direct contact between Chinese and foreign trading enterprises. China also relied more upon foreign financing and imports.

During the 1980s, these reforms led to average annual rates of growth of 10% in agricultural and industrial output. Rural per capita real income doubled. China became self-sufficient in grain production; rural industries accounted for 23% of agricultural output, helping absorb surplus labor in the countryside. The variety of light industrial and consumer goods increased. Reforms began in the fiscal, financial, banking, price-setting, and labor systems.

By the late 1980s, however, the economy had become overheated with increasing rates of inflation. At the end of 1988, in reaction to a surge of inflation caused by accelerated price reforms, the leadership introduced an austerity program.

China's economy regained momentum in the early 1990s. During a visit to southern China in early 1992, China's paramount leader at the time, Deng Xiaoping, made a series of political pronouncements designed to reinvigorate the process of economic reform. The 14th Party Congress later in the year backed Deng's renewed push for market reforms, stating that China's key task in the 1990s was to create a "socialist market economy." The 10-year development plan for the 1990s stressed continuity in the political system with bolder reform of the economic system.

Following the Chinese Communist Party's Third Plenum, held in October 2003, Chinese legislators unveiled several proposed amendments to the state constitution. One of the most significant was a proposal to provide protection for private property rights. Legislators also indicated there would be a new emphasis on certain aspects of overall government economic policy, including efforts to reduce unemployment (now in the 8-10% range in urban areas), to rebalance income distribution between urban and rural regions, and to maintain economic growth while protecting the environment and improving social equity. The National People's Congress approved the amendments when it met in March 2004. The Fifth Plenum in October 2005 approved the 11th Five-Year Economic Program aimed at building a "harmonious society" through more balanced wealth distribution and improved education, medical care, and social security.

AgricultureChina is the world's most populous country and one of the largest producers and consumers of agricultural products. Over 40% of China's labor force is engaged in agriculture, even though only 10% of the land is suitable for cultivation and agriculture contributes only 13% of China's GDP. China's cropland area is only 75% of the U.S. total, but China still produces about 30% more crops and livestock than the United States because of intensive cultivation, China is among the world's largest producers of rice, corn, wheat, soybeans, vegetables, tea, and pork. Major non-food crops include cotton, other fibers, and oilseeds. China hopes to further increase agricultural production through improved plant stocks, fertilizers, and technology. Incomes for Chinese farmers are stagnating, leading to an increasing wealth gap between the cities and countryside. Government policies that continue to emphasize grain self-sufficiency and the fact that farmers do not own--and cannot buy or sell--the land they work have contributed to this situation. In addition, inadequate port facilities and lack of warehousing and cold storage facilities impede both domestic and international agricultural trade.

IndustryIndustry and construction account for about 46% of China's GDP. Major industries are mining and ore processing; iron; steel; aluminum; coal, machinery; textiles and apparel; armaments; petroleum; cement; chemicals; fertilizers; consumer products including footwear, toys, and electronics; automobiles and other transportation equipment including rail cars and locomotives, ships, and aircraft; and telecommunications.

China has become a preferred destination for the relocation of global manufacturing facilities. Its strength as an export platform has contributed to incomes and employment in China. The state-owned sector still accounts for about 40% of GDP. In recent years, authorities have been giving greater attention to the management of state assets--both in the financial market as well as among state-owned-enterprises--and progress has been noteworthy.

Regulatory EnvironmentThough China's economy has expanded rapidly, its regulatory environment has not kept pace. Since Deng Xiaoping's open market reforms, the growth of new businesses has outpaced the government's ability to regulate them. This has created a situation where businesses, faced with mounting competition and poor oversight, will be willing to take drastic measures to increase profit margins, often at the expense of consumer safety. This issue acquired more prominence in 2007, with the United States placing a number of restrictions on problematic Chinese exports. The Chinese Government recognizes the severity of the problem, recently concluding that up to 20% of the country's products are substandard or tainted, and undertaking efforts in coordination with the United States and others to better regulate the problem.

EnergyTogether with strong economic growth, China's demand for energy is surging rapidly. In 2003, China surpassed Japan to become the second-largest consumer of primary energy, after the United States. China is the world's second-largest consumer of oil, after the United States, and for 2006, China's increase in oil demand represented 38% of the world total increase in oil demand. China is also the third-largest energy producer in the world, after the United States and Russia. China's electricity consumption is expected to grow by over 4% a year through 2030, which will require more than $2 trillion in electricity infrastructure investment to meet the demand. China expects to add approximately 15,000 megawatts of generating capacity a year, with 20% of that coming from foreign suppliers.

Coal makes up the bulk of China's energy consumption (70% in 2005), and China is the largest producer and consumer of coal in the world. As China's economy continues to grow, China's coal demand is projected to rise significantly. Although coal's share of China's overall energy consumption will decrease, coal consumption will continue to rise in absolute terms. China's continued and increasing reliance on coal as a power source has contributed significantly to putting China on the path to becoming the world's largest emitter of acid rain-causing sulfur dioxide and green house gases, including carbon dioxide.

The 11th Five-Year Program, announced in 2005, calls for greater energy conservation measures, including development of renewable energy sources and increased attention to environmental protection. Moving away from coal towards cleaner energy sources including oil, natural gas, renewable energy, and nuclear power is an important component of China's development program. China has abundant hydroelectric resources; the Three Gorges Dam, for example, will have a total capacity of 18 gigawatts when fully on-line (projected for 2009). In addition, the share of electricity generated by nuclear power is projected to grow from 1% in 2000 to 5% in 2030. China's renewable energy law, which went into effect in 2006, calls for 10% of its energy to come from renewable energy sources by 2020.

Since 1993, China has been a net importer of oil, a large portion of which comes from the Middle East. Net imports are expected to rise to 3.5 million barrels per day by 2010. China is interested in diversifying the sources of its oil imports and has invested in oil fields around the world. Beijing also plans to increase China's natural gas production, which currently accounts for only 3% of China's total energy consumption. Analysts expect China's consumption of natural gas to more than double by 2010.

In May 2004, then-Secretary of Energy Spencer Abraham signed a Memorandum of Understanding (MOU) with China's National Development and Reform Commission (NDRC) that launched the U.S.-China Energy Policy Dialogue. The dialogue has strengthened energy-related interactions between China and the United States, the world's two largest energy consumers. The U.S.-China Energy Policy Dialogue builds upon the two countries' existing cooperative ventures in high energy nuclear physics, fossil energy, energy efficiency and renewable energy and energy information exchanges. The NDRC and the Department of Energy also exchange views and expertise on Peaceful Uses of Nuclear Technologies, and we convene an annual Oil and Gas Industry Forum with China.

In July 2009, during the U.S.-China Strategic and Economic Dialogue, the two countries negotiated a Memorandum of Understanding (MOU) to Enhance Cooperation on Climate Change, Energy, and the Environment in order to expand and enhance cooperation between the two sides on clean and efficient energy, to protect the environment, and to ensure energy security.

EnvironmentOne of the serious negative consequences of China's rapid industrial development has been increased pollution and degradation of natural resources. Many analysts estimate that China will surpass the United States as the world's largest emitter of carbon dioxide and other greenhouse gases in 2009. A World Health Organization report on air quality in 272 cities worldwide concluded that seven of the world's 10 most polluted cities were in China. According to China's own evaluation, two-thirds of the 338 cities for which air-quality data are available are considered polluted--two-thirds of them moderately or severely so. Respiratory and heart diseases related to air pollution are the leading cause of death in China. Almost all of the nation's rivers are considered polluted to some degree, and half of the population lacks access to clean water. By some estimates, every day approximately 300 million residents drink contaminated water. Ninety percent of urban water bodies are severely polluted. Water scarcity also is an issue; for example, severe water scarcity in Northern China is a serious threat to sustained economic growth and the government has begun working on a project for a large-scale diversion of water from the Yangtze River to northern cities, including Beijing and Tianjin. Acid rain falls on 30% of the country. Various studies estimate pollution costs the Chinese economy 7%-10% of GDP each year.

China's leaders are increasingly paying attention to the country's severe environmental problems. In 1998, the State Environmental Protection Administration (SEPA) was officially upgraded to a ministry-level agency, reflecting the growing importance the Chinese Government places on environmental protection. In recent years, China has strengthened its environmental legislation and made some progress in stemming environmental deterioration. In 2005, China joined the Asia Pacific Partnership on Clean Development, which brings industries and governments together to implement strategies that reduce pollution and address climate change. During the 10th Five-Year Plan, China plans to reduce total emissions by 10%. Beijing in particular invested heavily in pollution control as part of its campaign to host a successful Olympiad in 2008. Some cities have seen improvement in air quality in recent years.

China is an active participant in climate change talks and other multilateral environmental negotiations, taking environmental challenges seriously but pushing for the developed world to help developing countries to a greater extent. It is a signatory to the Basel Convention governing the transport and disposal of hazardous waste and the Montreal Protocol for the Protection of the Ozone Layer, as well as the Convention on International Trade in Endangered Species and other major environmental agreements.

The question of environmental impacts associated with the Three Gorges Dam project has generated controversy among environmentalists inside and outside China. Critics claim that erosion and silting of the Yangtze River threaten several endangered species, while Chinese officials say the dam will help prevent devastating floods and generate clean hydroelectric power that will enable the region to lower its dependence on coal, thus lessening air pollution.

The United States and China are members of the Asia Pacific Partnership on Clean Development and Climate (APP). The APP is a public-private partnership of six nations--Australia, China, India, Japan, the Republic of Korea, and the United States--committed to explore new mechanisms to meet national pollution reduction, energy security and climate change goals in ways that reduce poverty and promote economic development. APP members have undertaken cooperative activities involving deployment of clean technology in partner countries in eight areas: cleaner fossil energy, renewable energy and distributed generation, power generation and transmission, steel, aluminum, cement, coal mining, and buildings and appliances.

The United States and China have been engaged in an active program of bilateral environmental cooperation since the mid-1990s, with an emphasis on clean energy technology and the design of effective environmental policy. While both governments view this cooperation positively, China has often compared the U.S. program, which lacks a foreign assistance component, with those of Japan and several European Union (EU) countries that include generous levels of aid.

Science and TechnologyScience and technology have always preoccupied China's leaders; indeed, China's political leadership comes almost exclusively from technical backgrounds and has a high regard for science. Deng called it "the first productive force." Distortions in the economy and society created by party rule have severely hurt Chinese science, according to some Chinese science policy experts. The Chinese Academy of Sciences, modeled on the Soviet system, puts much of China's greatest scientific talent in a large, under-funded apparatus that remains largely isolated from industry, although the reforms of the past decade have begun to address this problem.

Chinese science strategists see China's greatest opportunities in newly emerging fields such as biotechnology and computers, where there is still a chance for China to become a significant player. Most Chinese students who went abroad have not returned, but they have built a dense network of trans-Pacific contacts that will greatly facilitate U.S.-China scientific cooperation in coming years. The U.S. space program is often held up as the standard of scientific modernity in China. China's small but growing space program, which successfully completed their second manned orbit in October 2005, is a focus of national pride.

The U.S.-China Science and Technology Agreement remains the framework for bilateral cooperation in this field. A 5-year agreement to extend the Science and Technology Agreement was signed in April 2006. The agreement is among the longest-standing U.S.-China accords, and includes over 11 U.S. Federal agencies and numerous branches that participate in cooperative exchanges under the Science and Technology Agreement and its nearly 60 protocols, memoranda of understanding, agreements, and annexes. The agreement covers cooperation in areas such as marine conservation, renewable energy, and health. Biennial Joint Commission Meetings on Science and Technology bring together policymakers from both sides to coordinate joint science and technology cooperation. Executive Secretaries meetings are held biennially to implement specific cooperation programs. Japan and the European Union also have high profile science and technology cooperative relationships with China.

TradeThe U.S. trade deficit with China reached $268 billion in 2008. U.S. imports from China accounted for 16.1% of overall U.S. imports in 2008. At the same time, the share of many other Asian countries' imports to the United States and the U.S. trade deficit with the Asia-Pacific region as a whole have fallen. U.S. goods exports to China, which accounted for 5.5% of total U.S. exports in 2008, totaled $71.5 billion, a 9.5% increase of $16.2 billion from 2007 ($55.3 billion). The top three U.S. exports to China in 2008 were electrical machinery ($11.4 billion), machinery ($9.7 billion), and aircraft ($5.1 billion). In July 2009, Treasury Secretary Timothy Geithner met with P.R.C. Vice Premier Wang Qishangin Beijing for the inaugural round of the Strategic and Economic Dialogue (for further details, please refer to the S&ED section below). In November 1991, China joined the Asia-Pacific Economic Cooperation (APEC) group, which promotes free trade and cooperation in the economic, trade, investment, and technology spheres. China served as APEC chair in 2001, and Shanghai hosted the annual APEC leaders meeting in October of that year.

China formally joined the WTO in December 2001. As part of this far-reaching trade liberalization agreement, China agreed to lower tariffs and abolish market impediments. Chinese and foreign businessmen, for example, gained the right to import and export on their own, and to sell their products without going through a government middleman. By 2005, average tariff rates on key U.S. agricultural exports dropped from 31% to 14% and on industrial products from 25% to 9%. The agreement also opens up new opportunities for U.S. providers of services like banking, insurance, and telecommunications. China has made significant progress implementing its WTO commitments, but serious concerns remain, particularly in the realm of intellectual property rights protection.

China is now one of the most important markets for U.S. exports: in 2008, U.S. exports to China totaled $71.5 billion, a 9.5% increase of $16.2 billion from 2007. U.S. agricultural exports have increased dramatically, totaling $12.2 billion in 2009 and thus making China our fourth-largest agricultural export market. Leading categories include: soybeans ($7.3 billion), cotton ($1.6 billion), and hides and skins ($859 million).

Export growth continues to be a major driver of China's rapid economic growth. To increase exports, China has pursued policies such as fostering the rapid development of foreign-invested factories, which assemble imported components into consumer goods for export, and liberalizing trading rights. In its eleventh Five-Year Program, adopted in 2005, China placed greater emphasis on developing a consumer demand-driven economy to sustain economic growth and address global imbalances.

The United States is one of China's primary suppliers of power generating equipment, aircraft and parts, computers and industrial machinery, raw materials, and chemical and agricultural products. However, U.S. exporters continue to have concerns about fair market access due to strict testing and standards requirements for some imported products. In addition, a lack of transparency in the regulatory process makes it difficult for businesses to plan for changes in the domestic market structure.

In April 2009, the United States and China announced that the Joint Commission on Commerce and Trade (JCCT) will continue to serve as the primary venue for the two countries to discuss trade issues. Under the Obama administration, the JCCT, which will be led by Commerce Secretary Gary Locke and U.S. Trade Representative Ron Kirk on the U.S. side and Vice Premier Wang Qishan on the Chinese side, will not only focus on discussing trade issues, but will also include broader issues such as healthcare and innovation and industrial policies.

Foreign InvestmentChina's investment climate has changed dramatically in a quarter-century of reform. In the early 1980s, China restricted foreign investments to export-oriented operations and required foreign investors to form joint-venture partnerships with Chinese firms. Foreign direct investment (FDI) grew quickly during the 1980s, but slowed in late 1989 in the aftermath of Tiananmen. In response, the government introduced legislation and regulations designed to encourage foreigners to invest in high-priority sectors and regions. Since the early 1990s, China has allowed foreign investors to manufacture and sell a wide range of goods on the domestic market, and authorized the establishment of wholly foreign-owned enterprises, now the preferred form of FDI. However, the Chinese Government's emphasis on guiding FDI into manufacturing has led to market saturation in some industries, while leaving China's services sectors underdeveloped. China is now one of the leading FDI recipients in the world, receiving over $80 billion in 2007 according to the Chinese Ministry of Commerce.

As part of its WTO accession, China undertook to eliminate certain trade-related investment measures and to open up specified sectors that had previously been closed to foreign investment. New laws, regulations, and administrative measures to implement these commitments are being issued. Major remaining barriers to foreign investment include opaque and inconsistently enforced laws and regulations and the lack of a rules-based legal infrastructure.

Opening to the outside remains central to China's development. Foreign-invested enterprises produce about half of China's exports, and China continues to attract large investment inflows. Foreign exchange and gold reserves were $2.033 trillion at the end of 2008, and have now surpassed those of Japan, making China's foreign exchange reserves the largest in the world.

Government
of
China

Chinese Communist Party

The 73.1 million member CCP, authoritarian in structure and ideology, continues to dominate government. Nevertheless, China's population, geographical vastness, and social diversity frustrate attempts to rule by fiat from Beijing. Central leaders must increasingly build consensus for new policies among party members, local and regional leaders, influential non-party members, and the population at large.

In periods of greater openness, the influence of people and organizations outside the formal party structure has tended to increase, particularly in the economic realm. This phenomenon is most apparent today in the rapidly developing coastal region. Nevertheless, in all important government, economic, and cultural institutions in China, party committees work to see that party and state policy guidance is followed and that non-party members do not create autonomous organizations that could challenge party rule. Party control is tightest in government offices and in urban economic, industrial, and cultural settings; it is considerably looser in the rural areas, where the majority of the people live.

Theoretically, the party's highest body is the Party Congress, which traditionally meets at least once every 5 years. The 17th Party Congress took place in fall 2007. The primary organs of power in the Communist Party include:

* The Politburo Standing Committee, which currently consists of nine members;

* The Politburo, consisting of 25 full members, including the members of the Politburo Standing Committee;

* The Secretariat, the principal administrative mechanism of the CCP, headed by Politburo Standing Committee member and executive secretary Xi Jinping;

* The Central Military Commission;

* The Discipline Inspection Commission, which is charged with rooting out corruption and malfeasance among party cadres.

State StructureThe Chinese Government has always been subordinate to the Chinese Communist Party (CCP); its role is to implement party policies. The primary organs of state power are the National People's Congress (NPC), the President (the head of state), and the State Council. Members of the State Council include Premier Wen Jiabao (the head of government), a variable number of vice premiers (now four), five state councilors (protocol equivalents of vice premiers but with narrower portfolios), and 25 ministers, the central bank governor, and the auditor-general.

Under the Chinese constitution, the NPC is the highest organ of state power in China. It meets annually for about two weeks to review and approve major new policy directions, laws, the budget, and major personnel changes. These initiatives are presented to the NPC for consideration by the State Council after previous endorsement by the Communist Party's Central Committee. Although the NPC generally approves State Council policy and personnel recommendations, various NPC committees hold active debate in closed sessions, and changes may be made to accommodate alternate views.

When the NPC is not in session, its permanent organ, the Standing Committee, exercises state power

POLITICAL CONDITIONS

Legal SystemThe government's efforts to promote rule of law are significant and ongoing. After the Cultural Revolution, China's leaders aimed to develop a legal system to restrain abuses of official authority and revolutionary excesses. In 1982, the National People's Congress adopted a new state constitution that emphasized the rule of law under which even party leaders are theoretically held accountable.

Since 1979, when the drive to establish a functioning legal system began, more than 300 laws and regulations, most of them in the economic area, have been promulgated. The use of mediation committees--informed groups of citizens who resolve about 90% of China's civil disputes and some minor criminal cases at no cost to the parties--is one innovative device. There are more than 800,000 such committees in both rural and urban areas.

Legal reform became a government priority in the 1990s. Legislation designed to modernize and professionalize the nation's lawyers, judges, and prisons was enacted. The 1994 Administrative Procedure Law allows citizens to sue officials for abuse of authority or malfeasance. In addition, the criminal law and the criminal procedures laws were amended to introduce significant reforms. The criminal law amendments abolished the crime of "counter-revolutionary" activity, although many persons are still incarcerated for that crime. Criminal procedures reforms also encouraged establishment of a more transparent, adversarial trial process. The Chinese constitution and laws provide for fundamental human rights, including due process, but these are often ignored in practice. In addition to other judicial reforms, the Constitution was amended in 2004 to include the protection of individual human rights and legally-obtained private property, but it is unclear how those provisions will be implemented. Although new criminal and civil laws have provided additional safeguards to citizens, previously debated political reforms, including expanding elections to the township level, and other legal reforms, including the reform of the reeducation through labor system, have been put on hold.

Human RightsThe China country reports in the State Department's 2008 Human Rights Practices and International Religious Freedom Reports noted China's well-documented and continuing abuses of human rights in violation of internationally recognized norms, stemming both from the authorities' intolerance of dissent and the inadequacy of legal safeguards for basic freedoms. Reported abuses have included arbitrary and lengthy incommunicado detention, forced confessions, torture, and mistreatment of prisoners as well as severe restrictions on freedom of speech, the press, assembly, association, religion, privacy, worker rights, and coercive birth limitation. China continues the monitoring, harassment, intimidation, and arrest of journalists, Internet writers, defense lawyers, religious activists, and political dissidents. The activities of non-governmental organizations (NGOs), especially those relating to the rule of law and expansion of judicial review, continue to be restricted. The Chinese Government recognizes five official religions--Buddhism, Islam, Taoism, Catholicism, and Protestantism--and seeks to regulate religious groups and worship. Religious believers who seek to practice their faith outside of state-controlled religious venues and unregistered religious groups and spiritual movements are subject to intimidation, harassment, and detention. In 2009, the Secretary of State again designated China as a "Country of Particular Concern" under the International Religious Freedom Act for particularly severe violations of religious freedom.

At the same time, China's economic growth and reform since 1978 has dramatically improved the lives of hundreds of millions of Chinese, increased social mobility, and expanded the scope of personal freedom. This has meant substantially greater freedom of travel, employment opportunity, educational and cultural pursuits, job and housing choices, and access to information. In recent years, China has also passed new criminal and civil laws that provide additional safeguards to citizens. Village elections, though often procedurally flawed, have been carried out in over 90% of China's approximately one million villages.

We have conducted 12 rounds of human rights dialogue with China since Tiananmen. During 2003 and 2004, no progress was made on the commitments China made at the 2002 dialogue, and we declined to schedule another round at that time. In July 2009, the United States and China affirmed our commitment to cooperate and enhance human rights issues through our human rights dialogue and other initiatives on the basis of equality and mutual respect. Both sides agreed to hold the next human rights dialogue before the year ends.

Two significant and sensitive anniversaries were commemorated in 2009: March 10 marked the 50th anniversary of the 1959 Tibetan uprising, and June 4 marked the 20th anniversary of the crackdown on pro-democracy protests at Tiananmen Square in Beijing. On March 10, 2008, protests in Lhasa marking the 49th anniversary turned violent, and led to protests and unrest throughout Tibet and the majority-Tibetan areas in surrounding provinces. Several people have been tried and executed for their involvement in the riots, in which 19 people died, according to official news sources. Various other groups claim a much higher death toll.

On July 5, 2009, ethnic violence erupted in Urumqi in Xinjiang Uighur Autonomous Region. The unrest continued in the following days, with Chinese state media reporting over 150 deaths and more than 1,000 injured. There was a significantly increased security presence in Urumqi and its surrounding areas and subsequently some mosques in Xinjiang were closed.

History
of
China

Dynastic Period

China is the oldest continuous major world civilization, with records dating back about 3,500 years. Successive dynasties developed a system of bureaucratic control that gave the agrarian-based Chinese an advantage over neighboring nomadic and hill cultures. Chinese civilization was further strengthened by the development of a Confucian state ideology and a common written language that bridged the gaps among the country's many local languages and dialects. Whenever China was conquered by nomadic tribes, as it was by the Mongols in the 13th century, the conquerors sooner or later adopted the ways of the "higher" Chinese civilization and staffed the bureaucracy with Chinese.

The last dynasty was established in 1644, when the Manchus overthrew the native Ming dynasty and established the Qing (Ch'ing) dynasty with Beijing as its capital. At great expense in blood and treasure, the Manchus over the next half century gained control of many border areas, including Xinjiang, Yunnan, Tibet, Mongolia, and Taiwan. The success of the early Qing period was based on the combination of Manchu martial prowess and traditional Chinese bureaucratic skills.

During the 19th century, Qing control weakened, and prosperity diminished. China suffered massive social strife, economic stagnation, explosive population growth, and Western penetration and influence. The Taiping and Nian rebellions, along with a Russian-supported Muslim separatist movement in Xinjiang, drained Chinese resources and almost toppled the dynasty. Britain's desire to continue its illegal opium trade with China collided with imperial edicts prohibiting the addictive drug, and the First Opium War erupted in 1840. China lost the war; subsequently, Britain and other Western powers, including the United States, forcibly occupied "concessions" and gained special commercial privileges. Hong Kong was ceded to Britain in 1842 under the Treaty of Nanking, and in 1898, when the Opium Wars finally ended, Britain executed a 99-year lease of the New Territories, significantly expanding the size of the Hong Kong colony.

As time went on, the Western powers, wielding superior military technology, gained more economic and political privileges. Reformist Chinese officials argued for the adoption of Western technology to strengthen the dynasty and counter Western advances, but the Qing court played down both the Western threat and the benefits of Western technology.

Early 20th Century ChinaFrustrated by the Qing court's resistance to reform, young officials, military officers, and students--inspired by the revolutionary ideas of Sun Yat-sen–began to advocate the overthrow of the Qing dynasty and creation of a republic. A revolutionary military uprising on October 10, 1911, led to the abdication of the last Qing monarch. As part of a compromise to overthrow the dynasty without a civil war, the revolutionaries and reformers allowed high Qing officials to retain prominent positions in the new republic. One of these figures, Gen. Yuan Shikai, was chosen as the republic's first president. Before his death in 1916, Yuan unsuccessfully attempted to name himself emperor. His death left the republican government all but shattered, ushering in the era of the "warlords" during which China was ruled and ravaged by shifting coalitions of competing provincial military leaders.

In the 1920s, Sun Yat-sen established a revolutionary base in south China and set out to unite the fragmented nation. With Soviet assistance, he organized the Kuomintang (KMT or "Chinese Nationalist People's Party"), and entered into an alliance with the fledgling Chinese Communist Party (CCP). After Sun's death in 1925, one of his protégés, Chiang Kai-shek, seized control of the KMT and succeeded in bringing most of south and central China under its rule. In 1927, Chiang turned on the CCP and executed many of its leaders. The remnants fled into the mountains of eastern China. In 1934, driven out of their mountain bases, the CCP's forces embarked on a "Long March" across some of China's most desolate terrain to the northwestern province of Shaanxi, where they established a guerrilla base at Yan'an.

During the "Long March," the communists reorganized under a new leader, Mao Zedong (Mao Tse-tung). The bitter struggle between the KMT and the CCP continued openly or clandestinely through the 14-year long Japanese invasion (1931-45), even though the two parties nominally formed a united front to oppose the Japanese invaders in 1937. The war between the two parties resumed after the Japanese defeat in 1945. By 1949, the CCP occupied most of the country.

Chiang Kai-shek fled with the remnants of his KMT government and military forces to Taiwan, where he proclaimed Taipei to be China's "provisional capital" and vowed to re-conquer the Chinese mainland. The KMT authorities on Taiwan still call themselves the "Republic of China."

The People's Republic of ChinaIn Beijing, on October 1, 1949, Mao Zedong proclaimed the founding of the People's Republic of China (P.R.C.). The new government assumed control of a people exhausted by two generations of war and social conflict, and an economy ravaged by high inflation and disrupted transportation links. A new political and economic order modeled on the Soviet example was quickly installed.

In the early 1950s, China undertook a massive economic and social reconstruction program. The new leaders gained popular support by curbing inflation, restoring the economy, and rebuilding many war-damaged industrial plants. The CCP's authority reached into almost every aspect of Chinese life. Party control was assured by large, politically loyal security and military forces; a government apparatus responsive to party direction; and the placement of party members into leadership positions in labor, women's, and other mass organizations.

The "Great Leap Forward" and the Sino-Soviet SplitIn 1958, Mao broke with the Soviet model and announced a new economic program, the "Great Leap Forward," aimed at rapidly raising industrial and agricultural production. Giant cooperatives (communes) were formed, and "backyard factories" dotted the Chinese landscape. The results were disastrous. Normal market mechanisms were disrupted, agricultural production fell behind, and China's people exhausted themselves producing what turned out to be shoddy, un-salable goods. Within a year, starvation appeared even in fertile agricultural areas. From 1960 to 1961, the combination of poor planning during the Great Leap Forward and bad weather resulted in one of the deadliest famines in human history.

The already strained Sino-Soviet relationship deteriorated sharply in 1959, when the Soviets started to restrict the flow of scientific and technological information to China. The dispute escalated, and the Soviets withdrew all of their personnel from China in August 1960. In 1960, the Soviets and the Chinese began to have disputes openly in international forums.

The Cultural RevolutionIn the early 1960s, State President Liu Shaoqi and his protégé, Party General Secretary Deng Xiaoping, took over direction of the party and adopted pragmatic economic policies at odds with Mao's revolutionary vision. Dissatisfied with China's new direction and his own reduced authority, Party Chairman Mao launched a massive political attack on Liu, Deng, and other pragmatists in the spring of 1966. The new movement, the "Great Proletarian Cultural Revolution," was unprecedented in communist history. For the first time, a section of the Chinese communist leadership sought to rally popular opposition against another leadership group. China was set on a course of political and social anarchy that lasted the better part of a decade.

In the early stages of the Cultural Revolution, Mao and his "closest comrade in arms," National Defense Minister Lin Biao, charged Liu, Deng, and other top party leaders with dragging China back toward capitalism. Radical youth organizations, called Red Guards, attacked party and state organizations at all levels, seeking out leaders who would not bend to the radical wind. In reaction to this turmoil, some local People's Liberation Army (PLA) commanders and other officials maneuvered to outwardly back Mao and the radicals while actually taking steps to rein in local radical activity.

Gradually, Red Guard and other radical activity subsided, and the Chinese political situation stabilized along complex factional lines. The leadership conflict came to a head in September 1971, when Party Vice Chairman and Defense Minister Lin Biao reportedly tried to stage a coup against Mao; Lin Biao allegedly later died in a plane crash in Mongolia.

In the aftermath of the Lin Biao incident, many officials criticized and dismissed during 1966-69 were reinstated. Chief among these was Deng Xiaoping, who reemerged in 1973 and was confirmed in 1975 in the concurrent posts of Politburo Standing Committee member, PLA Chief of Staff, and Vice Premier.

The ideological struggle between more pragmatic, veteran party officials and the radicals re-emerged with a vengeance in late 1975. Mao's wife, Jiang Qing, and three close Cultural Revolution associates (later dubbed the "Gang of Four") launched a media campaign against Deng. In January 1976, Premier Zhou Enlai, a popular political figure, died of cancer. On April 5, Beijing citizens staged a spontaneous demonstration in Tiananmen Square in Zhou's memory, with strong political overtones of support for Deng. The authorities forcibly suppressed the demonstration. Deng was blamed for the disorder and stripped of all official positions, although he retained his party membership.

The Post-Mao EraMao's death in September 1976 removed a towering figure from Chinese politics and set off a scramble for succession. Former Minister of Public Security Hua Guofeng was quickly confirmed as Party Chairman and Premier. A month after Mao's death, Hua, backed by the PLA, arrested Jiang Qing and other members of the "Gang of Four." After extensive deliberations, the Chinese Communist Party leadership reinstated Deng Xiaoping to all of his previous posts at the 11th Party Congress in August 1977. Deng then led the effort to place government control in the hands of veteran party officials opposed to the radical excesses of the previous two decades.

The new, pragmatic leadership emphasized economic development and renounced mass political movements. At the pivotal December 1978 Third Plenum (of the 11th Party Congress Central Committee), the leadership adopted economic reform policies aimed at expanding rural income and incentives, encouraging experiments in enterprise autonomy, reducing central planning, and attracting foreign direct investment into China. The plenum also decided to accelerate the pace of legal reform, culminating in the passage of several new legal codes by the National People's Congress in June 1979.

After 1979, the Chinese leadership moved toward more pragmatic positions in almost all fields. The party encouraged artists, writers, and journalists to adopt more critical approaches, although open attacks on party authority were not permitted. In late 1980, Mao's Cultural Revolution was officially proclaimed a catastrophe. Hua Guofeng, a protégé of Mao, was replaced as premier in 1980 by reformist Sichuan party chief Zhao Ziyang and as party General Secretary in 1981 by the even more reformist Communist Youth League chairman Hu Yaobang.

Reform policies brought great improvements in the standard of living, especially for urban workers and for farmers who took advantage of opportunities to diversify crops and establish village industries. Literature and the arts blossomed, and Chinese intellectuals established extensive links with scholars in other countries.

At the same time, however, political dissent as well as social problems such as inflation, urban migration, and prostitution emerged. Although students and intellectuals urged greater reforms, some party elders increasingly questioned the pace and the ultimate goals of the reform program. In December 1986, student demonstrators, taking advantage of the loosening political atmosphere, staged protests against the slow pace of reform, confirming party elders' fear that the current reform program was leading to social instability. Hu Yaobang, a protégé of Deng and a leading advocate of reform, was blamed for the protests and forced to resign as CCP General Secretary in January 1987. Premier Zhao Ziyang was made General Secretary and Li Peng, former Vice Premier and Minister of Electric Power and Water Conservancy, was made Premier.

1989 Student Movement and Tiananmen SquareAfter Zhao became the party General Secretary, the economic and political reforms he had championed came under increasing attack. His proposal in May 1988 to accelerate price reform led to widespread popular complaints about rampant inflation and gave opponents of rapid reform the opening to call for greater centralization of economic controls and stricter prohibitions against Western influence. This precipitated a political debate, which grew more heated through the winter of 1988-89.

The death of Hu Yaobang on April 15, 1989, coupled with growing economic hardship caused by high inflation, provided the backdrop for a large-scale protest movement by students, intellectuals, and other parts of a disaffected urban population. University students and other citizens camped out in Beijing's Tiananmen Square to mourn Hu's death and to protest against those who would slow reform. Their protests, which grew despite government efforts to contain them, called for an end to official corruption and for defense of freedoms guaranteed by the Chinese constitution. Protests also spread to many other cities, including Shanghai, Chengdu, and Guangzhou.

Martial law was declared on May 20, 1989. Late on June 3 and early on the morning of June 4, military units were brought into Beijing. They used armed force to clear demonstrators from the streets. There are no official estimates of deaths in Beijing, but most observers believe that casualties numbered in the hundreds.

After June 4, while foreign governments expressed horror at the brutal suppression of the demonstrators, the central government eliminated remaining sources of organized opposition, detained large numbers of protesters, and required political reeducation not only for students but also for large numbers of party cadre and government officials.

Following the resurgence of conservatives in the aftermath of June 4, economic reform slowed until given new impetus by Deng Xiaoping's dramatic visit to southern China in early 1992. Deng's renewed push for a market-oriented economy received official sanction at the 14th Party Congress later in the year as a number of younger, reform-minded leaders began their rise to top positions. Deng and his supporters argued that managing the economy in a way that increased living standards should be China's primary policy objective, even if "capitalist" measures were adopted. Subsequent to the visit, the Communist Party Politburo publicly issued an endorsement of Deng's policies of economic openness. Though not completely eschewing political reform, China has consistently placed overwhelming priority on the opening of its economy.

Third Generation of LeadersDeng's health deteriorated in the years prior to his death in 1997. During that time, President Jiang Zemin and other members of his generation gradually assumed control of the day-to-day functions of government. This "third generation" leadership governed collectively with President Jiang at the center.

In March 1998, Jiang was re-elected President during the 9th National People's Congress. Premier Li Peng was constitutionally required to step down from that post. He was elected to the chairmanship of the National People's Congress. Zhu Rongji was selected to replace Li as Premier.

Fourth Generation of LeadersIn November 2002, the 16th Communist Party Congress elected Hu Jintao, who in 1992 was designated by Deng Xiaoping as the "core" of the fourth generation leaders, the new General Secretary. A new Politburo and Politburo Standing Committee was also elected in November.

In March 2003, General Secretary Hu Jintao was elected President at the 10th National People's Congress. Jiang Zemin retained the chairmanship of the Central Military Commission. At the Fourth Party Plenum in September 2004, Jiang Zemin retired from the Central Military Commission, passing the Chairmanship and control of the People's Liberation Army to President Hu Jintao.

China is firmly committed to economic reform and opening to the outside world. The Chinese leadership has identified reform of state industries and the establishment of a social safety network as government priorities. Government strategies for achieving these goals include large-scale privatization of unprofitable state-owned enterprises and development of a pension system for workers. The leadership has also downsized the government bureaucracy.

The Next 5 YearsThe next 5 years represent a critical period in China's development. To investors and firms, especially following China's accession to the World Trade Organization (WTO) in 2001, China represents a vast market that has yet to be fully tapped and a low-cost base for export-oriented production. Educationally, China is forging ahead as partnerships and exchanges with foreign universities have helped create new research opportunities for its students. China will host the Summer Olympics in Beijing in 2008 and views this as an opportunity to showcase to the world China's development gains of the past two decades. The current leadership is committed to generating greater economic development in the interior and providing more services to those who do not live in China's coastal areas, goals that form the core of President Hu's concepts of a "harmonious society." However, there is still much that needs to change in China. Human rights issues remain a major concern, as does China's lack of effective controls to prevent proliferation of weapons of mass destruction (WMD)-related materials and technology. Abatement of pollution and improvements in systems to ensure food, drug, and product safety are issues on which the United States has begun work with China.

LanguageThere are seven major Chinese dialects and many subdialects. Mandarin (or Putonghua), the predominant dialect, is spoken by over 70% of the population. It is taught in all schools and is the medium of government. About two-thirds of the Han ethnic group are native speakers of Mandarin; the rest, concentrated in southwest and southeast China, speak one of the six other major Chinese dialects. Non-Chinese languages spoken widely by ethnic minorities include Mongolian, Tibetan, Uyghur and other Turkic languages (in Xinjiang), and Korean (in the northeast).

The Pinyin System of RomanizationOn January 1, 1979, the Chinese Government officially adopted the pinyin system for spelling Chinese names and places in Roman letters. A system of Romanization invented by the Chinese, pinyin has long been widely used in China on street and commercial signs as well as in elementary Chinese textbooks as an aid in learning Chinese characters. Variations of pinyin also are used as the written forms of several minority languages.

Pinyin has now replaced other conventional spellings in China's English-language publications. The U.S. Government also has adopted the pinyin system for all names and places in China. For example, the capital of China is now spelled "Beijing" rather than "Peking."

ReligionReligion plays a significant part in the life of many Chinese. Buddhism is most widely practiced, with an estimated 100 million adherents. Traditional Taoism also is practiced. Official figures indicate there are 20 million Muslims, 15 million Protestants, and 5 million Catholics; unofficial estimates are much higher. While the Chinese constitution affirms religious toleration, the Chinese Government places restrictions on religious practice outside officially recognized organizations. Only two Christian organizations--a Catholic church without official ties to Rome and the "Three-Self-Patriotic" Protestant church--are sanctioned by the Chinese Government. Unauthorized churches have sprung up in many parts of the country and unofficial religious practice is growing. In some regions authorities have tried to control activities of these unregistered churches. In other regions, registered and unregistered groups are treated similarly by authorities and congregations worship in both types of churches. Most Chinese Catholic bishops are recognized by the Pope, and official priests have Vatican approval to administer all the sacraments.

Population PolicyWith a population officially just over 1.3 billion and an estimated growth rate of about 0.6%, China is very concerned about its population growth and has attempted with mixed results to implement a strict birth limitation policy. China's 2002 Population and Family Planning Law and policy permit one child per family, with allowance for a second child under certain circumstances, especially in rural areas, and with guidelines looser for ethnic minorities with small populations. Enforcement varies, and relies largely on "social compensation fees" to discourage extra births. Official government policy opposes forced abortion or sterilization, but in some localities there are instances of forced abortion. The government's goal is to stabilize the population in the first half of the 21st century, and current projections are that the population will peak at around 1.6 billion by 2050.

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